[H1067]How To File Chapter 13

An attorney called me today and I had to share this with you right away before I forget it. The attorney said: "I hear you are a Chapter 13 expert." (Great. He started out with a compliment to soften me up.) He continued: "My client has $180,000.00 worth of equity in his home and needs to file a Chapter 13. How fast could you prepare the bankruptcy petition?"

My first question to the attorney was: "Can your client fund a Chapter 13?" (For those of you new to the field, let me explain what this means.)

In order for a person to pass the Means Test and file a Chapter 13, they must have enough money left over every month to make a payment to the Trustee, who in turn pays the creditors. That means that after deducting the amount of money the debtor earns (Schedule I of the bankruptcy petition) from the total amount of expenses (Schedule J of the bankruptcy petition), there must be enough money left over to pay the creditors. Granted, the debtor does not always have enough left over to pay their creditors back 100%, but they must have enough to pay something if they are going to quality for a Chapter 13.

So, when I asked the attorney if his client had enough money left over to fund the Chapter 13 plan, he said he didn't know. Therefore, it was evident this attorney needed some training in how to assess a client for a potential bankruptcy filing. As you may or may not know, not every person who is in debt will be helped by filing bankruptcy. I am sure you have heard horror stories from some people who have filed bankruptcy when they shouldn't have. But their attorney (some of them who are only interested in the lining their own pockets) advised them to file. However, the client was not a good candidate for bankruptcy and ended up suffering the consequences.

But, the attorney that called me was very persistent. He forwarded me the client intake forms, copies of the client's paycheck stubs and tax returns. I then had to call the client and get a list of their monthly expenses, such as mortgage payment, car payments, insurance, taxes, student loan payment, cell phones and other personal expenses like food and clothing. Once I had completed Schedule J of the bankruptcy petition I had an average monthly expense total of $2,875.18.

Unfortunately, the debtor only earned $2,264.33 after all his taxes were deducted from his paycheck. This left him in the RED by $610.85.

NOTICE: A bankruptcy petition should NEVER be filed with a negative number if the debtor is seeking to reaffirm on their secure debts. Why? Because the creditors will see that the debtor cannot afford to pay them back and they may not submit to a Reaffirmation Agreement. Who can continue living month after month if they are losing $610.85 every month? Besides, where is the $610.85 coming from that is lost? In other words, it is impossible to be $610.85 in the RED every month unless you are drawing the money from a bank account, or a roommate or relative is helping to pick up the slack.

So, with $610.85 in the RED every month, this debtor would have no ability to have money left over to pay his creditors. Therefore, this debtor would not pass the Means Test to file a Chapter 13. Regardless of what the attorney wants and regardless of what the debtor wants, this debtor will only qualify for a Chapter 7 if he files a petition right now.

Now the question becomes, what is going to happen to the $180,000.00 in equity that the debtor has in his home if he files a Chapter 7? Easy. Some or all of that money will be used to pay the creditors that the debtor owes money to. Think about it. If John Brown owed you $25,000.00. Would you be happy to allow him to keep $180,000.00 and not pay you anything? Of course not. And neither would the creditors. They want as much as they can get of that $180,000.00 that they can get.

In my opinion (as a paralegal who is not an attorney), the debtor would be better off not filing bankruptcy. Honest attorneys I have worked for in the past who encountered debtors in this situation would advise them to get a second mortgage and pay off their bills instead of filing bankruptcy. Otherwise, if this debtor filed a Chapter 7 bankruptcy petition, his fate would be in the hands of the Trustee and Judge of the bankruptcy court regarding the unexempt equity he would have in his house.

However, if the debtor obtained a second job, rented out part of his house or did something to bring in additional income to fund a Chapter 13 plan, he could file a Chapter 13 bankruptcy. In this scenario, the debtor would not need to worry about the unexempt equity in his home because he would be making payments to pay off his creditors.

Of course, every debtor situation is unique and different. But this article is being written for training purposes only and it is not to be considered as legal advice. Be sure to consult with the attorney you are working for as a virtual bankruptcy assistant in matters you encounter regarding this subject matter.

Keep learning and keep prospering. I am proud of all of the virtual bankruptcy assistants and I know you are all doing the best you can. I hope this article helps provide you with more training and insight into the consumer bankruptcy world and helps you to improve your bankruptcy petition preparation skills.